DOI: 10.1515/aet-2017-0005

PRELIMINARY REPORT

Ivor Altaras PROFIT OF TOURISM Penda COMPANIES AND THEIR MARKET EVALUATION ON ZSE

ABSTRACT: The author of this paper presents a mechanism that anticipates all the available statistical analysis of data on realized profits of information based on which the prices of the 39 companies in the tourist sector, whose shares are shares are created as a monetary expression EconomicaActa Et Turistica, Vol 3 (2017), No. 1, pp. 1-98 listed on the and used of the presumed value of companies. On the for active trading. Data on the realized profit for other hand, this information tells us about the the companies in accounting period 2010 - 2015 expectations of active market participants about is correlated with the prices of shares. Based on the future development of the tourism sector, the above obtained results about the direction and which already accounts for almost 20% of the strength of this correlation the author concludes Croatian GDP. In addition, the author examines about the extent to which the market takes into what other explanations could be used for the account profit of the companies as a relevant part of variance which is not explained with the indicator for investments. This information can correlation between profit and price of shares. be extremely significant because, on the one hand, it provides information about the functionality of KEY WORDS: ourism companies, ZSE, earnings, the market as a comprehensive socio-economic share price

doc. dr. sc. Ivor Altaras Penda, MBA, assistant professor, Libertas International University, Zagreb, ; lecturer, College for Financial Management RRiF e-mail: [email protected] Ivor Altaras Penda PROFIT OF TOURISM COMPANIES AND THEIR MARKET EVALUATION ON ZSE

INTRODUCTION maximum of 20%, which has already been reached in Croatia. Should this share further increase this The Republic of Croatia is very proud of its would represent a significant increase in risk for abundant natural and cultural beauty. And rightly the economy in the event of an economic crisis so. On the World Heritage list under the protection situation6 on the one hand, while on the other of UNESCO1 there are currently one natural hand this would not speak of the power of tourist and 7 cultural sites2, and additional 16 are on the activities but of the weakness of other economic application list for consideration to receive the sectors which are not developing sufficiently. protected status. In addition, we currently have In any case, the fact is that Croatian tourism has 14 registered elements on the World’s Intangible made a considerable progress in the last decade as Heritage of Humanity list.3 By the number of seen in the documents on increasing the share of protected tangible and intangible heritage by tourism in GDP from 14.9% in 2010 to 18% in UNESCO, and given the number of inhabitants, 2014. (Altaras: 2015: 19), Today, in 2016, the figure 40 the Republic of Croatia is among the best in the has, as I have already mentioned, further increased. Acta EconomicaActa Et Turistica, Vol 3 (2017), No. 1, pp. 1-98 world. It is thus not surprising that Croatian people are aware of the importance and beauty It would be expected that if the tourism industry of the country in which they live, and that their is progressing, then also the companies engaged relationship to their environment is woven into in tourism business should show better financial the national anthem which, not coincidentally, is results, which should be reflected in their financial titled “Our Beautiful Homeland”. This kind of statements. Consequently, the value of these beauty is a gift of God4 that has been given to us companies should increase and this should for safekeeping, but also for economic exploitation. consequently result in an increase in share In the absence of industrial development which prices of those tourist companies that are we have, not for economically justifiable reasons, registered as joint share companies and whose abruptly interrupted after our independence, it shares are listed on the regulated capital market. is the natural and cultural heritage as well as our This claim is also the basis of the hypothesis of this gastronomy that has shown itself as the single paper that I will try to analyse and confirm. most important source of economic growth, primarily through various forms of tourist activities. Thus we, little by little, come to the fact TOURISM THROUGH THE PRISM OF that tourism contributes to Croatian GDP with a EARNED PROFIT AND SHARE PRICES significant percentage of about 20%. This, along with Malta, makes us a country where tourism In the twentieth century, Croatian regions have contributes most to the overall economy in the experienced two major waves of emigration. The European Union. If we know that there is no first one occurred at the beginning of the century country in the world that can functionally cover when, because of the phylloxera (vine disease) all of its expenses with only one economic sector, hundreds of local people would leave from the then we can ask the question: What would be the coastal areas and especially Dalmatia to the big acceptable level at which it is appropriate to rely wide world7 on an almost daily basis. They were on certain industries? Of course, there are no looking for a better life, so we consider them universal metrics that could accommodate all of economic migrants. The second wave took place the countries, but the economic profession almost at mid-century, i.e. after the World War II. Then, unanimously adopted the view that for a country in search of a better life, many left their homes with similar characteristics as Croatia5 tourism hoping to avoid a life behind the “Iron Curtain” as an industry should contribute to GDP with a as Winston Churchill figuratively said in his Ivor Altaras Penda PROFIT OF TOURISM COMPANIES AND THEIR MARKET EVALUATION ON ZSE

famous speech held in 1946 in the United States, Besides being the purpose of any business enterprise, describing the political situation which stretched as I have already stated, profit represents the final from the Baltic to the Adriatic. (ultimate) statement of business efficiency. At least this is so in terms of theoretical concepts. Today, however (although we almost continuously live in a time of some current crisis), Croatian In reality, however, in many of its elements, littoral, has become extremely trendy. We talk stated profit does not necessarily represent the about the Mediterranean diet as the best nutrition real state of affairs of a company. The reasons to sustain life and health, and this on a global for this are multiple. Probably the most common level; real estate has achieved exceptional prices; one is the fact that different legal regulations and every year dozens of new hotels are being opened; international accounting standards allow companies private accommodation increases in quality and the to recognize a variety of different costs and business number of visitors is increasing each year. Adriatic investments that are considered to be recognized as rental position has thus become like winning the deductions and which reduce profits. Entrepreneurs 41 lottery. In such circumstances, it is not surprising gladly use this fact because this also reduces the that the coastline with its associated tourism tax base and, consequently, the amount of profit EconomicaActa Et Turistica, Vol 3 (2017), No. 1, pp. 1-98 activities is the toughest part of our economy.8 tax. Experience tells us that this area is particularly suitable for the so-called “creative accounting” in Tourism is, of course, a comprehensive economic which entrepreneurs try as much as possible to branch that involves the existence of a number of reduce the tax base while governments introduce other production and service sectors that serve increasing restrictions on such occurrences through to support it.9 And all this with a final purpose their everyday legislations. to create additional value or profit at the end of the business process. This is a universal business In addition, and particularly visible in the public rule that is the lifeblood of a business enterprise. sector, there are companies (and even whole It should, therefore, be applicable to the tourism sectors), which, although often have market (and sector. If there is no gain, there is no rational natural) monopoly in their business activities, do reason for the existence of a certain activity. not even seek to realize profits, as their primary objective of existence is to offer public service The exact calculation of the overall economic reach or to be a place for (social) care of many people of tourist activities in the wider national economy whose workplace, in terms of business efficiency, is one of the most difficult economic areas because is not always completely justified. even with the most sophisticated econometric methods we cannot get a completely accurate Due to these serious constraints of profit as the Tourism Satellite Account, which would answer indicator of business excellence, in the analysis of the question of reach. Here it should be noted that the financial and business state of a company, I will even when expressing the share of tourism in GDP take into account several, or even a multitude of we speak only on the level of assessment, and it is different indicators which will then be considered significant that the Central Bureau of Statistics as the in a broader time interval. official source of data only states the realized income As in this paper I analyse companies that realize in tourism, but says nothing about the realized their earnings in the market and are mainly profit. Therefore, possible profit remains the great privately owned10, their profits and prices of unknown. And in fact, it is realized profit that would financial instruments (shares) which are traded give us economically relevant information. In doing on a regulated market remain the fundamental so, the conceptual difference between the income indicators of business success (or lack thereof) and and the realized profit is enormous. attractiveness of investing in them. Ivor Altaras Penda PROFIT OF TOURISM COMPANIES AND THEIR MARKET EVALUATION ON ZSE

METHODOLOGY OF WORK AND FINDINGS conclusions on the development of our tourism sector on the . However, In this paper, I analyse profit per share as the most this information can greatly deceive us because common way of displaying company profit and trading data of some shares show us that only 18 will correlate this data with the prices of shares of the 30 shares were traded with at least five times of analysed companies. In doing so I have used within the past year. popular methodological practices for calculating In addition, as a major structural problem of this earnings per share, according to which data on index is the fact that it is composed of only 5 shares. net income attributed to equity holders (not Throughout the history of the new index, there was comprehensive income) is used as data. a period (for example, from 8 November 2013 to 8 I used business years 2010 to 2015 as the May 2014) when CROBEXturist was constructed observed period. from only two shares. Therefore, we can be justified in asking the question: how meaningful 42 I selected this period for two reasons. First, despite is the calculation of the tourism sector index if it Acta EconomicaActa Et Turistica, Vol 3 (2017), No. 1, pp. 1-98 the fact that the mentioned period of time is the contains only 2 (or 5) shares? What value have we period of stagnation of Croatian economy (which gained with such a calculation? From the position was evident in the decline of GDP), it was from of statistical analysis this situation actually prevents 2010 onwards that Croatian tourism started to any appropriate conclusion, but it also reveals that increase its share in GDP. This growth is only in our capital market is shallow and non-liquid. This its small part a result of contraction of the overall is perhaps in itself the best indicator of the current economy, and it is mainly due to the original inner investment situation in the Republic of Croatia. growth of tourism as an economic branch. The other reason is that our period of five years can Therefore, the analysis of this work will not be guided serve as a good enough indicator of the consistency by the tourist sector index but the overall tourism of the profit (or loss) of individual companies. It sector present at the Zagreb Stock Exchange. is believed that in the analysis of any individual As the basic conditions set for making this analysis financial indicators, including the reported profit, it I took two criteria: is necessary to observe a minimum of a three-year period. In this context, the five-year period may 1. That the observed companies have made publicly serve as relevant. available the information on realized profit per share for each year in the analysed period - here The Zagreb Stock Exchange (ZSE) as the only I was led by the principle of comparability of regulated capital market in the Republic of Croatia, published financial statements. in addition to its oldest and best-known index (CROBEX), has also been keeping sectoral indices 2. That the observed shares were used for trading since 2013, wishing thereby to further enhance at least 5 times within each analysed year - here I the measurement of the overall market sentiment. was led by the principle of the minimum liquidity Thus, there are sectoral indices for industrial areas of financial instruments. (CROBEXindustrija), food (CROBEXnutris), transportation (CROBEXtransport) and even With these set conditions, I arrived to the fact that tourism (CROBEXturist). The tourism sector is of the 30 listed tourism companies only 22 meet particularly interesting due to its characteristics. these requirements. This made their shares my Within this sector there are currently as many as overall statistical sample. 30 shares listed, making it the most represented by Then, for each of these 22 observed shares I found the number of companies. It could be used to make information about the price (P) and earnings per Ivor Altaras Penda PROFIT OF TOURISM COMPANIES AND THEIR MARKET EVALUATION ON ZSE

share (EPS) as of 30 May of each year observed. known, and the annual reports are without a doubt Although I could have chosen a different reference such important information. point for the analysis of share prices, this date Having received the necessary information, I set is convenient because it is far enough from the out to calculate the overall result of the profit / final statutory deadline for publication of the loss for each company in a way that I added up all final, audited and consolidated annual financial of the profit / loss for the year under review for statements of companies. This is important in each share. This gave me the total amount of the order to avoid possible influences of financial profit / loss that in a direct way tells us whether statements of companies on the movement of the owners of the company (shareholders) in share prices. The phenomenon of increased price general achieved total profit or loss in the period fluctuations before and after the announcement of 2010 - 2015. important information from the company is well-

43 Acta EconomicaActa Et Turistica, Vol 3 (2017), No. 1, pp. 1-98 FIGURE 1. SCATTER DIAGRAM AND STATISTICS FOR THE ENTIRE SAMPLE OF SHARES OF THE TOURISM SECTOR ON THE ZSE y = 2,4713x + 192,05 R2 = 0,6255 Series 1 3.000,00

2.500,00

2.000,00

1.500,00

1.000,00 DIFFERENCES IN PRICE (%) 500,00

0,00

-500,00 -200,00 0,00 200,00 400,00 600,00 800,00 1.000,00 DIFFERENCES IN EARNING PER SHARE (%)

Number of analysed shares: 22; R2 = 0.625; p <0.000; Pearson’s coefficient: 0.790 Ivor Altaras Penda PROFIT OF TOURISM COMPANIES AND THEIR MARKET EVALUATION ON ZSE

Interesting data emerged from this analysis that in the market price of the shares from the tourist out of the 22 observed shares of the tourism sector sector listed on the Zagreb Stock Exchange (ZSE) in the period 2010 - 2015, only 12 of them made in the business period between 2010 - 2015. This profit, while 10 of them recorded a total loss. confirms the hypothesis of this paper. This fact is, perhaps, outside the usual perception In addition, we can note that even 62.5% of of Croatian tourism as an industry in which the the scatter variance can be explained by an achievement of profit is easy and implied with independent variable (for R2 = 0.625), which I regard to the development of our tourist activities. think is a very good result. In addition, Pearson’s It turned out that this was not so. coefficient further confirms this fact, because its Although stated profit somewhat hides the right value is a high 79%. business situation in companies (it is not the same This result of the study is not surprising given the if the loss was due to inadequate business or the confirmation of statistically significant association reported loss is a result of investment in new 44 between these variables with other relevant accommodation facilities, which are shown as an Acta EconomicaActa Et Turistica, Vol 3 (2017), No. 1, pp. 1-98 research on this subject, which have so far been expense before the reported profit), the fact is that conducted in Croatia and around the world – the company profits are the item that is used to pay United States, Turkey, Romania, Scandinavia, out the dividends to shareholders. Therefore, the Great Britain and many other countries. (Collins, ability of generating a profit is a strong motive for D., Maydew, E. and Weiss, I., (1997); Harris, investing in the equity of companies. T.; Lang, M. and Moller, H., (1994); Pervan, I.; Next, I brought the obtained data on the total Vasilj, M. (2008)). reported profit / loss in connection with the The remaining part of the unexplained variance information on the difference between the price can, certainly, be well explained by the whole of each share earned in the observed reference set of other variables that have their influence days (the difference in price on 30 May, 2016 in in the process of trading in the capital market. relation to the price realized on 30 May, 2011), These other variables may include: shortcomings through statistical methods of linear regression (as of profit as an indicator of the real state of the often applied econometric method in the analysis company; other financial indicators of surveyed of the interdependence of two variables). In doing companies; other information on the operations so, the share price on 30 May 2011, tells us about of the observed companies that are not included the effect of the financial statements from the in the financial statements like, for example, year 2010, while the price on 30 May 2016 about certificate of marriages and still unrealized the effect of operations from 2015. jobs in the future or subjective expectations of Graphic view of performed analysis can be seen the investors; inefficiency and lack of liquidity in Figure 1. of domestic capital markets; prevailing trade sentiment that strongly varies - from intense The results obtained offer us valuable information. fear to euphoria and other possible impacts. Firstly, given the fact that the p value is less All this confirms the view that the fundamental than 0.05 (which in social sciences is considered indicators of the company, although for a shorter maximum value to confirm the existence of a period of time, may not have a significant impact. statistical association between the variables), we In the long term, it is the ability of the management can confirm that there is a statistically significant and the business strength of the company that relationship between the two observed variables determine the price of shares of the observed – the total shown profits and realized variations companies. Ivor Altaras Penda PROFIT OF TOURISM COMPANIES AND THEIR MARKET EVALUATION ON ZSE

CONCLUSION REFERENCES

Given the findings of this work, it can be 1 United Nations Educational, Scientific and Cultural concluded that, despite the objective shortcomings Organization. of the profit of companies as the fundamental 2 These are: The old town of Dubrovnik, Diocletian's variable for analysis in relation to the change of Palace in Split, the historical core of Trogir, Episcopal Complex of the Euphrasian Basilica in Poreč, St.. James prices of observed shares in the tourism sector in Šibenik, Starogradsko polje on Hvar and Plitvice Lakes in a given time interval, there is a statistically National Park, and during the writing of this paper as the significant correlation between these two seventh cultural site on the Croatian territory (or in the variables. Direction of that correlation is positive, region i.e. Bosnia and Herzegovina and Serbia) medieval but given the level of explained variance it is tombstones (stecaks) were added to the list. also a very powerful one. This fully confirms 3 These are: Ojkanje, Singing in two voices of and the hypothesis of this paper. This analysis result the Croatian coast, Klape harmony singing, Bećarac, the Kastav Carnival, Silent Wheel dance of Dalmatia, Alka, is consistent with other research conducted on lace making, making traditional wooden toys, Procession of 45

this subject made in the Republic of Croatia and the Cross in Hvar, Feast of St. Blaise from Dubrovnik, the EconomicaActa Et Turistica, Vol 3 (2017), No. 1, pp. 1-98 abroad. procession of the queen from Gorjani, gingerbread hearts and the Mediterranean diet. Additionally, as an unexpected finding of this 4 Big fans of our country love to recount a folk legend about research it was found that 45% of companies in how God left this piece of land for himself, and since he gave the tourism sector despite the strong growth of all the other countries to other nations, he had no choice but tourism as an economic sector in the Republic to leave it as a legacy just for us. of Croatia in the period from 2010 - 2015, did 5 This primarily refers to the geographical location, population, not achieve an overall positive result of reported political constitution and other socio-cultural characteristics. profit. This information can be very meaningful 6 From an ecological disaster in the to terrorist and interesting for the investor community, threats that would jeopardize our tourism. economic analysts and in particular shareholders 7 Mostly in the Americas, but also in Australia and New of companies from the tourism sector. Zealand. 8 The share of tourism in the continental part of the Croatian does not exceed 5% of our tourism. 9 From the food sector all the way to the construction sector. 10 The Republic of Croatia has especially activated the privatization process in the tourism sector lately, so shares in tourism companies such as hotels Imperial (Rab), Sunčani Hvar (Hvar), Hotels Živogošće (Igrane) and others are on sale. Ivor Altaras Penda PROFIT OF TOURISM COMPANIES AND THEIR MARKET EVALUATION ON ZSE

LITERATURE

Books and scientific journals ALTARAS PENDA, I. (2015), “Tourism sector on the Zagreb Stock Exchange (ZSE): the worth of Croatian tourism?” Acta Economica Et Turistica, No. 1, Vol 1/2015, 15-40 COLLINS, D., MAYDEW, E. AND WEISS, I. (1997), “Changes in the value relevance of earnings and book values over the past forty years”. Journal of Accounting and Economics, 24, 39-67 DELOITTE (2015), IFRS in your pocket – 2015. London: Deloitte (available online at: http://www2.deloitte.com/ 46 hr/hr/pages/audit/articles/ifrs-in-your-pocket-2015.html – accessed 20/03/2016) Acta EconomicaActa Et Turistica, Vol 3 (2017), No. 1, pp. 1-98 HARRIS, T., LANG, M. AND MOLLER, H. (1994), “The value relevance of German accounting measures: An empirical analysis”. Journal of Accounting Research, 32 (2): 187-209 PERVAN, I., VASILJ, M. (2008), “Vrijednosna važnost glavnice i dobiti – empirijska analiza za hrvatske korporacije sa zagrebačke burze”. Ekonomska istraživanja, Vol. 22, No. 4 , 2009, Zagreb ŽAGER, K., ŽAGER, L. (1996), Analiza financijskih izvještaja. Zagreb: Masmedia

Internet resources Financial Agency – www.fina.hr My shares – www.mojedionice.com Central Depository and Clearing Company – www.skdd.hr Zagreb Stock Exchange – www.zse.hr